There is angst in the capital markets about deflation. Basically, market participants are worried that a lack of demand is forcing prices lower and causing consumers to wait longer for the prices to fall further before they make purchases. The concern is that this will become a downward price spiral that leads to recession or worse.
This is simply not the case, however. Oil prices are a result of a glut of oil, not a lack of demand (miles driven in the U.S. are now at record levels -- how is that a lack of demand?). What goes on in China has very little impact on U.S. gross domestic product, because the U.S. is the most closed economy of any industrial nation, and it is mainly driven by services. Finally, recent data show that the U.S. consumer is doing well if you consider that auto sales are at historically high levels and the consumer is borrowing once again. So, a "deflationary spiral" does not appear to be a real issue in the U.S.
The biggest political complaint, and one that should be of concern, is that wages are not keeping up with inflation despite what appears to be a very tight labor market. The real problem here is that the "official" inflation number, the consumer price index, doesn't come close to representing real inflation in the U.S. but is used as a proxy for it. As a result, wages have lagged significantly behind the real cost of living.
So, let's look at the CPI itself. The month-over-month September CPI showed a negative reading (-0.15%) when compared to August, and the year-over-year September CPI showed a 0% growth in prices. As a result, the Social Security Administration has announced that Social Security recipients will receive no cost-of-living increase in 2016 because there was no increase in the CPI. Really!
The U.S. is in no danger at all of having a "deflationary" spiral. Rather, because the CPI in the U.S. is used as a proxy for wage increases, the fact that it hasn't represented reality for more than 30 years continually puts the U.S. middle class in jeopardy. The fact is, the CPI does not represent inflation in the U.S. and is a very serious, but unrecognized, problem. Because it is used as a proxy for inflation, America's wage earners suffer as a result.
Long ago, in the '80s, when inflation was quite high, the government changed the way the CPI was calculated in order to curb the increases in social security and federal pensions that would have bankrupted the Treasury by now if real inflation had been recognized. Today, the CPI calculation uses more than 80,000 items. There is an imputed price decline when an item embodies more technology. And a very complex and controversial seasonal adjustment process (concurrent seasonal adjustment) is used.
Think about 80,000 items. Do you really purchase that many items? In one year? In five years? In 10 years? In Dallas, there is a firm (Chapwood Investments) that calculates the changes in prices of the 500 most frequently purchased items. (After all, 500 items seem more meaningful for the consumer than 80,000). The firm calculates the changes every six months for the 500 items in America's 50 largest cities. Chapwood does not massage the data in any way -- no seasonal adjustment, no alterations, no gimmicks. It just reports the prices. Although it may be ignoring some quality improvements, when you look at the accompanying table, the differences between the price changes of the 500 most common items purchased and the CPI are so stark that you will conclude that quality improvements couldn't possibly be at play here.
The table shows the last four years and the annualized rate of change for the past six months for 10 cities that were selected from the Chapwood list. They were selected to represent all of the regions in the U.S. Compare these changes to the official CPI which is shown at the bottom.
As you can now imagine, and as stated clearly on the Chapwood Web site, the real economic issue in the U.S. is that wage increases are tied to the downwardly biased CPI. As we all know, since the '80s, middle-class families have had to move to two incomes in order to make ends meet. The middle class continues to disappear, and, with each passing year, a greater percentage of the population has become dependent on some form of government transfer. Could it be that wages (mostly earned by middle- and lower-income groups) are simply not keeping up with prices because the real level of inflation is not recognized by the CPI?
The complaint today by the political class is that wages are not rising fast enough and that is hurting the middle class, yet there is no complaint that the reason for the slow growth in wages is an inflation gauge, the CPI, that not only doesn't measure inflation, but its most common use as a proxy for inflation ends up being quite harmful for both the social structure and the economy.
Robert Barone (Ph.D., Economics, Georgetown University), an adviser representative of Concert Wealth Management, is a Principal of Universal Value Advisors (UVA), Reno, NV, a business entity. Advisory services are offered through Concert Wealth Management, a Registered Investment Advisor.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. A more detailed description of Concert Wealth Management, its management and practices is contained in its "Firm Brochure" (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.